Why We Like Clarkson PLC’s (LON:CKN) 9.2% Return On Capital Employed

By
Simply Wall St
Published
November 08, 2019

Today we'll look at Clarkson PLC (LON:CKN) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.

So, How Do We Calculate ROCE?

Analysts use this formula to calculate return on capital employed:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

Or for Clarkson:

0.092 = UK£46m ÷ (UK£642m - UK£143m) (Based on the trailing twelve months to June 2019.)

So, Clarkson has an ROCE of 9.2%.

Check out our latest analysis for Clarkson

Is Clarkson's ROCE Good?

One way to assess ROCE is to compare similar companies. In our analysis, Clarkson's ROCE is meaningfully higher than the 5.4% average in the Shipping industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Aside from the industry comparison, Clarkson's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.

Take a look at the image below to see how Clarkson's past growth compares to the average in its industry.

LSE:CKN Past Revenue and Net Income, November 8th 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Clarkson.

Clarkson's Current Liabilities And Their Impact On Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.

Clarkson has total liabilities of UK£143m and total assets of UK£642m. Therefore its current liabilities are equivalent to approximately 22% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.

Our Take On Clarkson's ROCE

That said, Clarkson's ROCE is mediocre, there may be more attractive investments around. Of course, you might also be able to find a better stock than Clarkson. So you may wish to see this free collection of other companies that have grown earnings strongly.

I will like Clarkson better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.

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